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Posted: July 21, 2009

Funding growth and exits in 2009

Successful deals can still be done by tapping private equity recaps

Bob Forbes

A private equity recapitalization, also known as a “recap” or “two-stage deal,” is a financial vehicle that is being increasingly used by savvy business owners for funding. As an owner of a privately held business, you can use a recap to:

--    Create liquidity by diversifying your wealth into investments outside of your business;
--    Pay down bank debt;
--    Remove personal guarantees; and
--    Create peace of mind for you and your family.

“Even though our industry has historically been minimally impacted by macroeconomic factors, today’s climate just is too unpredictable,” said Karen Padgett, CEO of Novus Biologicals. “We wanted to take some chips out of our business and off the table, as well as have capital readily available for European expansion. Partnering with a private equity group through a recap enabled us to do these things."

Investors today find recaps attractive because they provide opportunities to achieve higher returns in an environment that they can help influence. “The current market provides an excellent opportunity for entrepreneurs with a compelling strategic vision to partner through a recap with a value-added private equity firm," said David Kessenich, president of Excellere Partners, a U.S. private equity firm.

"The business platform then has the capital and strategic resources to capitalize on market uncertainty and accelerate growth while competitors are distracted by internal challenges,” Kessenich said

How does a recap work?


Recaps are complex structured vehicles, demanding the right understanding and expertise. First, you will need an attorney that has extensive experience with multiple recap structures, ideally one who has represented both sides of the transaction. Second, you will need a tax expert who understands the nuances of these types of deal structures and some of the pending tax code changes relevant to a recap. Third, you need a mergers and acquisitions advisor who is an expert on creatively structuring and negotiating recaps.

An M&A advisor, in particular, will drive deal value and bring together the right parties and position the right investment thesis. An experienced M&A advisor will maximize the size of “the pie,” and then make sure you get your fair share.

Is a recap right for you?   

Whether or not it is time for you to start exploring the recap option depends on many factors.  The strongest candidates for recaps are well-run companies that have defined opportunities for significant growth and are leaders in their market niche.

Oftentimes, the private equity group will prefer a controlling interest in your firm. So while you maintain day-to-day control of the business, you may need to get comfortable with a new partner participating in strategic decisions. If you think a private equity recap might help you achieve your strategic goals, an M&A advisor is your best resource begin a dialogue.

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Bob Forbes is a Mergers & Acquisitions Master Intermediary with over 15 years of experience in business transactions, as a transaction advisor, business owner and private equity executive. He has started, built, acquired and sold numerous companies.  He presently serves on the board of directors for the Colorado Association of Business Intermediaries and is an active member of the M&A Source, IBBA and Association for Corporate Growth.

Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

Terrible article. In your "How Does a Recap Work," you explain 100% of nothing how a recap works except how to hire experts like yourself to get involved. How do editors let articles like this get printed? Or maybe I should ask how do experts get away with writing articles like this. Bottom line, I knew nothing about recaps before I read the article and am no better off after reading your article. Thanks. Ed By Ed Lehrburger on 2009 07 23

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